8 QUESTIONS FOR 3 BUFFETTS

THE NEW YORK TIMES, TUESDAY, OCTOBER 23, 20138 Questions for 3 BuffettsBy Jeffrey GoldfarbWarren E. Buffett’s son Howard Graham Buffett and hisgrandson Howard Warren Buffett have written a new book,”Forty Chances: Finding Hope in a Hungry World,” whichchronicles their philanthropic work on hunger, farming andpoverty around the world. This is an edited transcript of adiscussion with Warren Buffett, his son and grandson.

Q. We’ve heard a lot about efficient markets over the past weekthanks to the Nobel Prizes. Warren, you’ve made a career outof exploiting inefficiencies. It’s hard not to come away fromthis book without thinking that food and agriculture are themost inefficient markets in the world. Why is that?

Howard Graham Buffett In the United States, it’s differentthan in Africa. In a developed country like ours, most of ithas to do with distribution systems. In many cases, it has todo with not having enough labor to deal with some of thefood that we produce. Our issues are not safety or, in mostcases, accessibility. Accessibility can be an issue in ruralareas. Affordability is less of an issue. Of course, it’s an issuefor some people. A lot of it has to do with what our policiesand rules are and whether that allows organizations to operateand function within them. And some of those rules are a bitprohibitive.

If you move to Africa, that gets really complex. It’s leadership,corruption, infrastructure, you name it. In eastern Congo, wejust finished building – we didn’t build it, but we fundedit – the building of a very small hydroelectric plant. Andwhen it was completed, there were two European companiesthat came immediately. One is producing soap because theDemocratic Republic of Congo doesn’t produce any soap andthe raw materials are there. And one is extracting enzymesfrom papaya. Before, they had no power, so now they can dothe processing. Sometimes, the things we think are so simplebut not so easy to grasp are the things that work the best. Evenin the middle of conflict, we are able to provide businessopportunity.

Q. Let’s talk about technology.

Warren Buffett I’ll just take a snooze over here.Howard Graham Buffett He’s done four tweets and I’ve donezero.

Q. You address some of it in the book. There’s GPS-run farmequipment, Judea Pearl’s application of Bayesian networksand Clay Mitchell’s “farm of the future.” Is Silicon Valleyinvolved enough in this area? Where can engineers andtechnology companies really make a difference?

Howard Warren Buffett There are some distinct areas wheretechnology will continue to play a growing and increasinglyimportant role, particularly addressing the challenge of linkingindividuals here in the United States, and increasing theirawareness and compassion of the challenges that are takingplace all over the world. We’ve seen certain Web sites pop upand become incredibly popular because they’ve done a veryeffective job at connecting someone sitting here in the UnitedStates with a smallholder-farmer in Kenya and the challengesshe’s facing every day. Making that direct connection issomething that establishes a lifetime link between someone inthe United States with the ability to make a small $5 donationwith someone somewhere else in the world for whom $5 canchange a lot.

Howard Graham Buffett In the eastern Congo, we go up intoareas controlled by the M23 rebels, so the World Food Programwon’t even deliver food up there. We can find other people todeliver the food, but we didn’t have a payment system thatcould work because we couldn’t pay cash up there. So you canbuy a little card for your phone, and everybody up there’s gota phone. It’s amazing. You can deliver the cash through thephone through the banking account, which actually solves atremendous problem. That’s a place where technology works.

Let me tell you about a place where technology won’t work.When you walk onto a farm and are standing on soil, there is notechnology that is going to take that soil and transform it intosomething that is five times more productive.

Africa is the most weathered continent in the world; 75 percentof its soil has been degraded. You don’t just bring that back.

I always like to say it’s like putting an oxygen mask on acadaver; it just isn’t going to work. You have to rebuild soils,rebuild fertility. That’s how you get productivity. There’s notgoing to be a technology to shortcut that. Technology doesn’tbuild organic material. Technology in that case may be able tohelp you find small, inexpensive ways to do soil testing thatwe don’t have today. So there are places where technology canassist in trying to figure out what are the best solutions, but theyaren’t always going to be the solutions themselves.

Howard Warren Buffett We have hope in innovation becausewe have to. One of the most important roles of technology isaround building awareness. We have a tool called Map the MealGap, where for the first time – starting maybe three years ago – people can go and see the number of hungry individualsright in their own community. That’s something you can’t dowithout the right technology in place.

Q. Warren, what does your lack of a stake in or an acquisitionof an ADM, Monsanto or DuPont say about the investmentthesis for the sorts of companies behind a lot of the work yourson and grandson are doing?

Warren Buffett Generally speaking, food processing andfarm building operations have been pretty capital intensive inrelation to profitability, so it has not been a field that looks tome like I’ve got an edge in. There could be an exception tothat. I’ve looked at some of the companies you mentioned andeven had an investment in one of them, but it’s a lot easier forme to understand Coca-Cola or Wells Fargo.

Q. Howard, you’re the one in the book who makes the directlink between value investing and applying the same long-termapproach to philanthropy. It hasn’t exactly caught on toowidely in investing. Is there any reason to think it can workbetter in your field?

Warren Buffett [Laughs]Howard Warren Buffett I’ve had the benefit of watching mydad over the last 15 years work at this and seen what grandpahas made successful at Berkshire translate down. When youask grandpa, “When you look to buy a company, what do youlook at?” one of the first things he’ll say is, “The person who’srunning it, the manager, the individual who knows more aboutthat business maybe than even I do.” What my dad has done soeffectively well is identify the best managers of philanthropiccapital you could ever imagine. There’s a half dozen chaptersin “40 Chances” dedicated to those kinds of people.

Howard Graham Buffett I didn’t start there, though.

Howard Warren Buffett One of my grandpa’s first rules in themanagement handbook is that shareholders are part owners ofthe company. When you talk about the dis-link in philanthropybetween having a customer and a donor, or a producer of aproduct, that doesn’t exist anywhere. There are no shareholdersin philanthropy; there are just beneficiaries. That’s a realproblem and part of the projects we have worked on so hard,especially in Afghanistan. How do we take individuals who aretrying to help and turn them into shareholders? They have toown what we’re building for them so that there are sustainableincome-generating activities at the end. What grandpa’s doneso well is bringing shareholders into the decision-makingprocess and doing it in a way that’s unique to a company thesize of Berkshire.

Howard Graham Buffett Think about what our process hasbeen for 40 years. We show up, we give stuff away, so peoplethink there’s no value in it. Then, when you try to build valuein something, they want it free. It just doesn’t work. And wego home. You create dependency, you create conflict, but whatyou certainly don’t create is value. That’s part of why wewrote this book. We have to stop doing things that don’t work.

Warren Buffett I’m not sure there’s necessarily a parallel. Ininvesting; you’re appealing to people’s desire to have a lot morenext year, 10 years from now or in 20 years. In philanthropy,you’re appealing to a different side of their nature. You’retrying to convince people who have been fortunate in lifethat there are an awful lot of people that did not get the longstraw. After you’ve taken care of yourself in a very good wayand your family and all that, a lot of people can benefit if youapply some of those excess funds intelligently in education,in medicine, all kinds of things. It’s a different appeal. Andpeople respond differently to them, too.

Q. When the day comes – say, maybe 50 years from now -when you become chairman of Berkshire, Howard, how do youthink your very different life experiences from your father’swill affect the company?

Howard Graham Buffett The best experience I had was tospend 50 years around my dad. I know how he thinks, I knowwhat he cares about and I know some of the promises he’smade to people he’s bought companies from. And the mostimportant thing to do is keep that integrity and keep thecredibility with those people and those managers who may bethe original people who started the company. One thing aboutBerkshire that’s incredibly fortunate is that there could bemore than one C.E.O. ‚Äì it’s up to the board and everything elsein the future – but it’s not like we have to look very far. Everycompany can’t say that. Part of that value is that Berkshire has50 C.E.O.’s and you have an array of choice. It’s not like it’sgoing to be a struggle to find somebody who can do a great jobrunning it. My job is pretty easy: It’s just to make sure nothingchanges a whole lot.

Warren Buffett I think he’ll be pretty good at this point. Hewouldn’t have been when he was 20 years old or 25. If aC.E.O. is put in there who does change in some way after theyget in the job or if it becomes more about them than about theshareholders in the company, I think Howie will be good atdetecting that. I think other members of our board will be, too.

But he’ll also be in a position where it’s relatively easy to dosomething about it. It’s very hard if you have a C.E.O. that’schairman and the directors meet every three or four months,it’s hard to change C.E.O.’s sometimes. They learn how toentrench themselves and start putting their friends on thenominating committee and all that. His position is for the one-in-a-hundred chance that somebody is not who we thoughtthey were when we put them in. The Bible says, blessed arethe meek for they shall inherit the earth, but it doesn’t saythey’ll stay meek after they inherit it. That’s the problem we’relooking at.

Q. With regard to tax policy in this country as it affectscharitable contributions, how should they be treated?

Warren Buffett It depends on how the whole tax code isset up. In terms of the really wealthy people, I don’t thinkit makes much difference whether or not they’re deductible.

Less than 1 percent of the money I have given away has beendeductible. My carry-forward is $11 billion or something likethat. It doesn’t mean anything. And I know some other prettywealthy people who have given away a lot of money and taxdeductions actually had nothing to do with it. And then, I’msure it does with some people. What the total sensitivity todeductibility is, it’s hard to tell. Some people don’t itemizedeductions at all, obviously. I don’t have a strong feeling.

Of course, everybody who runs a philanthropic organizationdoesn’t want it touched. I do not have a strong feeling thatit’s sacred that they be fully deductible or what portion ofincome. The code says to me if I give appreciated securitiesto a controlled foundation I like, I can’t deduct more than 20percent of my adjusted gross income. If I give cash to publiccharities, I can deduct 50 percent. So we’ve got a lot of policyalready built into the code. Do I think that 20 percent versus50 percent has changed the mix of how people behave? I don’tthink so very much.

Q. You’re a contrarian investor. On Tuesday, we had Tiger 21,a group of American and Canadian multimillionaire investors,choosing Berkshire Hathaway as their top pick, displacingApple. To use your own famous phrase, should other investorsbe fearful as these buyers get greedy?

Warren Buffett The way to look at Berkshire is trying to figureout what our businesses are worth today and whether themoney we reinvest will be reinvested reasonably intelligently.I try to give a lot of information in the annual report to enableour shareholders to make a reasonable estimate of whatintrinsic value is. If you buy Berkshire at or below its intrinsicbusiness value, I think you’ll do reasonably well over timebecause I think the money we reinvest will be compoundedfairly intelligently. Therefore, if you don’t overpay going in,you’re likely to do O.K. It’s never going to be the stock of theyear. From this size, it cannot compound at a terrific rate ofreturn. It’s simply out of the question. I think it can compoundat a reasonable rate of return.

Q. So Berkshire’s last five-year comparison against theStandard & Poor’s 500-stock index isn’t a concern?

Warren Buffett Let’s assume this year ends the way it is sofar, four of those five years have been over 15 percent yearsfor the S.&P. That is not when we shine. We do better in downmarkets or modestly up markets. I’m certain our goal is to domoderately better than the S.&P., and I think we can probablydo it, but I don’t think it’s a sure thing.

Jeffrey Goldfarb is an assistant editor for ReutersBreakingviews. For more independent commentary andanalysis, visit breakingviews.